RPT-FOCUS-China Three Gorges sounds out interest in EDP's U.S. assets - sources

5 Min Read

(Repeats JUNE 26 story, no change to text)

* Three Gorges in discussions with European utilities -sources

* Seeks potential buyer for EDP’s U.S. renewable assets -sources

* Aimed at smoothing U.S. approval for planned EDP deal -sources

By Dasha Afanasieva, Clara Denina and Sergio Goncalves

LONDON/LISBON, June 26 (Reuters) - China Three Gorges has held talks with European utilities to gauge their interest in buying EDP’s U.S. renewables business, as it looks to smooth the path for its planned takeover of the Portuguese company, three sources familiar with the matter said.

The aim of identifying potential buyers is to preempt any objections from U.S. authorities, who are increasingly scrutinising Chinese acquisitions of American assets in strategic industries and could block the proposed takeover of EDP, the banking sources told Reuters.

China Three Gorges, a Chinese state-owned utility, has sounded out European firms including Italy’s Enel, Spain’s Iberdrola, France’s Engie and German firms E.ON and RWE, the sources said.

However while Engie would be interested in the U.S. assets, the others are unlikely to seek a deal, the sources added.

Enel, Iberdrola, Engie, E.ON and Iberdrola all declined to comment, while China Three Gorges did not respond to a request for comment.

The U.S. Treasury, which oversees the Committee on Foreign Investment in the United States (CFIUS) that examines deals for national security risks, did not immediately respond to a request for comment on the planned takeover of power firm EDP.

China Three Gorges launched a $10.8 billion bid in May to take control of EDP, Portugal’s biggest company, of which it already owns 23 percent, although there is no guarantee its approach will be successful.

A strategy of lining up a prospective buyer for the U.S. assets would be an example of a Chinese company taking preemptive steps to mitigate risks associated with intensifying trade tensions between China and the United States.

European utilities have been undergoing a wave of consolidation, seeking to create scale partly because of the increasing shift to renewable energy sources that is forcing them to change business models.

‘CROWN JEWELS’

The United States and China have exchanged import tariffs on billions of dollars of goods from the other country. Part of the dispute centres on U.S. allegations that China has stolen American intellectual property, an accusation denied by Beijing.

CFIUS has stepped up its scrutiny of deals since Donald Trump became president in 2017, with Chinese investment in particular facing closer examination.

During the roughly 14 months of the Trump administration to March 1, the committee blocked 12 Chinese deals, or nearly half of the 27 transactions it completed reviews of, and the fate of nine more were still undecided, according to an analysis here by the law firm Pillsbury Winthrop Shaw Pittman.

By contrast, in 2016 only four Chinese deals were blocked out of 26 that were reviewed, partner Tom Shoesmith said.

EDP’s renewables arm, EDP Renovaveis SA (EDPR), operates in 12 countries across Europe and the Americas. Its U.S. assets are valued at around 6.7 billion euros ($7.8 billion) including debt compared with EDPR’s 13.9 billion euros enterprise value, according to research from Caixa Bank BPI.

“EDP’s crown jewels are the renewable assets in the U.S. which are owned in the portfolio of EDPR. CTG (China Three Gorges) knows that they would not get approval from CFIUS to keep them should they own a majority stake in EDP,” one of the sources said.

The U.S. assets are a major player in the country’s wind energy market, with a total capacity of 4,382 megawatts and a market share of around 7 percent.

French utility Engie, which plans to switch all of its gas operations to biogas and renewable hydrogen by 2050, making it 100 percent green, would be interested in the U.S. assets, two of the sources said. On Tuesday it denied reports that it was interested in the whole of EDPR. Two of the banking sources and a separate source familiar with the situation said Enel would not be interested in EDP’s renewable assets in the United States because it already had a renewables business in the country.

Germany’s E.ON and RWE would also be unlikely to bid because they are tied up on a landmark deal to split up Innogy’s assets between them, the sources added.

Divesting the American renewable assets could appease U.S. regulators but Portugal’s government is reluctant to see EDPR split off, regarding it as an integral part of the utility’s portfolio, one of the sources said.

“The Portuguese government values EDP as their only international company and they are adamant to keep it all together,” the source said.

A spokesman for Prime Minister Antonio Costa referred Reuters to Costa’s previous statement which said the government had no objections to China Three Gorges’ planned takeover.